Critique of Activity-Based Costing

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Tutorial.png Unit 4 

Introduction | Traditional Approach to Assigning Overheads | Critique of Traditional Methods of Cost Accounting | Activity-Based Costing | Steps in Activity-Based Costing | Critique of Activity-Based Costing

The principal drawback of the ABC approach is that it is extremely time-consuming. Open schools, colleges and universities are unlikely to have the capacity to design and carry out a detailed ABC study in-house and will, therefore, need to employ consultants for this purpose, which would be costly. Exceptionally detailed records must be maintained in order to facilitate regular ABC exercises. Even when the institution’s accounting systems have been modified to enable expenditure to be analysed and attached to particular cost objects, considerable time will be required each year to estimate the number of staff hours devoted to different activities.

It is also easy to overlook some activities and the costs associated with them. Staff members rarely devote a hundred percent of their working hours to productive activities that benefit the employer. Leaving aside non-productive pastimes (such as chatting with co-workers, attending funerals and reading the newspaper), some worthy activities that are carried out during working hours are impossible to account for. For example, how should we allocate the cost of an employee taking part in an AIDS awareness campaign? Using the ABC method, it is all too easy for such costs to go unrecorded with the result that the total costs identified fall short of actual expenditure as recorded in audited accounts. Such ‘cost leaks’ can be very substantial. A recent study (Rumble, 2006, page 70) reported that up to fifty percent of the working hours of staff in a particular unit of an ODL institution could not be accounted for using the ABC method.

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If you would like to find out more about the topics in this Unit, please refer to the following resources:

Rumble, G. 1997. Costs and Economics of Open and Distance Learning. Chapter 7, pages 51-59.

Wikipedia. Article on Activity-Based Costing, electronic document.